Microsoft Could – And Should – Eradicate Facebook. Here’s How.

[Editor’s note: Joachim Kempin is a former top Microsoft executive and author of a new memoir, Resolve and Fortitude: Microsoft’s `Secret Power Broker’ Breaks His Silence. It’s a fantastic book, and I’ve asked Kempin to write a few columns for us sharing his perspective on Microsoft. In this, his second column for us, Kempin argues Microsoft should take over the social networking space, and get out of the hardware business. –Dan Lyons]

Last week I gave you a historical perspective about Microsoft and pinpointed several areas for improvements. Today I will continue that discussion with more food for thought:

Reinvent Social Media Software

Microsoft could create lots of magic by developing advanced social media software, which would be so user-friendly that even a dog could use it with ease. The leading product, Facebook, lacks a good user interface; while it connects you, it basically sucks. Its value lies in its huge user base, the vast computer network it needs to function, and the ease with which it attracts immense amounts of advertising dollars.

As with any social media network, the vast user information it contains is its most valuable asset. This is the main reason why Google is making a serious effort in that product category. By properly analyzing and evaluating this info with modern data-mining techniques, Facebook can create unprecedented consumer market knowledge and deliver well-targeted advertising. Microsoft has only a very small share in this business.

Therefore, Microsoft needs to reinvent this space and make it easier, more fun and more intuitive for users to create a lively community. Convincing current social media users to migrate into a Microsoft-conceived realm will take time and incentives, and will require an easy transition path in form of a few clever mouse clicks to reestablish links and move existing user information into a more captivating universe.

A Facebook-like product with superior functionality and vastly improved privacy features, including characteristics from Twitter, Google+ and LinkedIn, would be extremely compelling. Microsoft has the technical capacity and the design wit to do this. In particular, when combined with free Skype usage, it could take a lot of advertising revenue away from Facebook and Google.

There’s also an opportunity to bend over backwards and open up the Chinese market. This could be done through a local partnership or a technology deal. Since Facebook is blocked in that country, Microsoft could have a nice growth opportunity.

In the ‘90s, Microsoft undertook something comparable with the Java programming language invented by Sun Microsystems. The principle applied was christened “embrace, extend, and innovate.” It succeeded because Microsoft improved a mediocre product by providing the necessary plumbing through foresight and architectural underpinning.

Applying the same method a second time, when reinventing social media software, would very likely succeed and curtail the success of Microsoft’s competitors.

But let’s not stop there. Let’s be audacious, and provide Internet Explorer (IE) with a long-needed boost by making social networking capabilities an integrated part of IE, available for everybody’s web-browser-fingertips, anywhere on any mobile and desktop device! This would be way more effective than spending advertising money to encourage people to use IE.

I can see the competitors already running for cover and complaining once again to the feds, but since it’s a “genuine technological integration” – as a court once ruled in regard to IE — such a move would represent a totally legal operating system/browser extension.

Research With A Product Angle

The other change I would introduce is to locate product development and relevant research personnel under one roof. The goal would be to accelerate the turning of research projects into marketable products.

This means abandoning the currently centralized research unit. Under this new scenario, the person running the Office group (for example) would pay for and guide his or her own research department. Therefore that executive would have the ultimate motivation to turn innovative ideas into money-making ventures. This was already talked about when I was still around, but has never been accomplished.

Best products win — mostly! The company needs to remember that and execute accordingly. Over the last decade it has not adhered well to that principle. Moving research into the product groups might just do the trick and re-infuse that old but so very successful principle and enable the company to lead in several categories, as it did in its glory days.

Products To Divest Of

Very simply put: All hardware devices. The foundation for Microsoft’s prosperous ecosystem was built with software DNA and partnerships with hardware producers and software vendors. The company’s leadership needs to remember these old roots and make it a priority to keep suppliers who support Microsoft’s platforms close, and enlarge that club with the ones who once left.

Its CEO and chairman know very well that re-earning formerly prevailing trust is the key to success here. It takes years to gain it, and only one wrong announcement or power grab to destroy it.

The reason why people prefer a certain computing device over another ultimately comes down to a combination of usefulness and affordability. Usefulness means how easily one can operate the device and how many software applications are made available for it. Charge too high a price, and users will most likely compromise and pick the cheaper and a less useful platform. Low price is the main reason why Windows PCs beat Macintosh computers by eight to one, and why Android-based smartphones outnumber iPhones. Apple’s products, while superior, are as overpriced as the wonderful Porsches I love so much.

Recently, Microsoft announced it is changing direction and wants to be known as a device and services company, so that it can show off its software products more favorably. I am not surprised about emphasizing a more intensive focus on cloud services, where competitors are way ahead. But I vehemently disagree with the idea of producing hardware devices to the detriment of loyal ecosystem partners. It simply undermines their trust, and is a distraction for the company.

Microsoft’s experience with building hardware is very limited. From computer mice and keyboards to the Xbox game console, the company has struggled for years to compete and be profitable in that field. Why will the newly introduced Surface tablets change that?

In the ‘80s, Microsoft ventured into producing hardware in form of memory cards, an add-on board for the Apple II so it could run CP/M software, as well as printer hardware and computer mice. I sold all of them as General Manger of Microsoft’s German subsidiary. With the exception of the computer mice and the Apple II add-on board, all of them flopped. When the Apple II fell out of favor, only the Microsoft mouse survived until the turn of the century when ergonomic keyboards and the Xbox game console showed up.

The mice are still getting produced, but just for the replacement market. My team sold 150 million of them to PC manufacturers, but the business was abandoned in 2000 because we were no longer price competitive in that cutthroat market segment. The same happened to keyboard sales. Dropping mice and keyboards altogether would make some friends — Logitech comes to mind — and would hardly be noticed on the balance sheet.

Xbox, Microsoft’s game console, came into existence to keep Sony from conquering the living room, as Bill Gates once pointed out. It came with a steep price. The company lost $6 billion to $8 billion in this venture. Even today, every Xbox remains subsidized. Its losses are made up with software royalties from game manufacturers, profits from Microsoft’s prospering “Halo” game and service fees paid by cloud services users. Leaving Xbox behind would therefore only cause a small revenue shortfall, and would hardly be noticeable at the bottom line.

The best solution: Spin the total hardware division off and continue to do game software. Game consoles, in particular, are a dying breed. The future of gaming for hard-core gamers will be on powerful PC systems equipped with high-end graphics and on tablets for the causal crowd. Sony’s recent PlayStation 4 announcement confirms this to some degree. Sony wants to revive game console sales by making them as powerful as PCs, or maybe even more powerful, by including social media connectivity, improved cloud services and key PC attributes. Why not just subsidize PCs instead of spending money on a proprietary platform design which will increase Sony’s losses for years to come?

The real money is in gaming software, period. Spinning Microsoft’s console business off would avoid future losses. And last but not least, Valve might be interested in buying that division. Who knows?

What else to get rid of: All retail stores. Sell online instead and clean up the messy Windows 8 application store or Windows 8 might join the lists of Redmond management casualties.

Next Step

Next week, I will focus on organizational issues and explain why a major organizational change is needed to revive Microsoft’s mojo.

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